Profile: Health Net Inc (HNT.N)

Health Net, Inc., incorporated in 1990, is a managed care company that delivers managed health care services through health plans and Government-sponsored managed care plans. The Company operates in three segments, Western Region Operations, Government Contracts and Northeast Operations. The Company provides and administers health benefits to approximately six million individuals across the country through group, individual, Medicare, Medicaid, the United States Department of Defense (DoD), including TRICARE, and Veterans Affairs programs. Its behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately five million individuals, including its own health plan members. Its subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs. In April 2012, its subsidiary, Health Net Life Insurance Company, sold its Medicare stand-alone Prescription Drug Plan (Medicare PDP) business to a subsidiary of CVS Caremark.

Western Region Operations Segment

The Company’s Western Region Operations segment includes the operations of its commercial and Medicaid health plans, as well as the operations of its health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the Company’s behavioral health and pharmaceutical services subsidiaries in a number of states, including Arizona, California and Oregon. As of December 31, 2011, the Company had approximately 2.6 million risk members in its Western Region Operations segment. The Company offers a range of managed health care products and services. Its health plans offer members coverage for a range of health care services, including ambulatory and outpatient physician care, hospital care, pharmacy services, behavioral health and ancillary diagnostic and therapeutic services.

The Company’s health maintenance organization (HMO) plans offer benefits for a fixed fee or premium that does not vary with the extent or frequency of medical services actually received by the member. Its preferred provider organization (PPO) plans offer coverage for services received from any health care provider, with benefits generally paid at a higher level when care is received from a participating network provider. The Company’s point of service (POS) plans blends the characteristics of HMO, PPO and indemnity plans. The Company offers network HMO products throughout its Western Region Operations. Its Salud Con Health NetSM product line is a suite of plans targeting the Latino community. The Company’s PremierCareSM HMO is a network built on a provider partnership with Sutter Health in Northern California. It has also developed network products with provider partners in Phoenix, Arizona and Portland, Oregon. As of December 31, 2011, with respect to the Company’s Western Region Operations segment, 57% of its commercial members were covered by conventional HMO products, 41% were covered by POS and PPO products, and 2% were covered by other related products. As of December 31, 2011, its total membership consisted of approximately 46% commercial risk, 7% Medicare Advantage, and 34% Medicaid.

The Company provides a range of Medicare products, including Medicare Advantage plans with and without prescription drug coverage, and Medicare supplement products. Its subsidiaries have a number of contracts with the Centers for Medicare & Medicaid Services (CMS) under the Medicare Advantage. The Company provides or arranges health care services normally covered by Medicare, plus a range of health care services not covered by traditional Medicare, usually in exchange for a fixed monthly premium per member from CMS that varies based on the geographic area in which the member resides, demographic factors of the member, such as age, gender and institutionalized status, and the health status of the member. Any additional benefits in its plans are covered by a monthly premium charged to the enrollee or through portions of payments received from CMS that may be allocated to these benefits, according to CMS regulations and guidance.

The Company provides Medicare Advantage plans in select counties in Arizona, California, Oregon and Washington. It also provides multiple types of Medicare Advantage Special Needs Plans, including dual eligible Special Needs Plans (designed for low income Medicare beneficiaries) in Arizona and California, chronic condition Special Needs Plans (designed for beneficiaries with congestive heart failure) in California, and chronic condition Special Needs Plans (designed for beneficiaries with congestive heart failure and diabetes) in Arizona. These plans provide access to additional health care and prescription drug coverage. As of December 31, 2011, the Company had 1,008,915 members enrolled in Medi-Cal (California’s Medicaid program) and other California state health programs. Medi-Cal is a public health insurance program, which provides health care services for low-income individuals, and is financed by California and the federal Government. As of December 31, 2011, through HNCS, it had Medi-Cal operations in 12 California counties: Fresno, Kern, King, Los Angeles, Madera, Orange, Riverside, Sacramento, San Bernardino, San Diego, Stanislaus and Tulare. As of December 31, 2011, 467,626 of its Medi-Cal members resided in Los Angeles County, representing approximately 54% of the Company’s Medi-Cal membership and approximately 46% of its membership in all California state health programs.

As of December 31, 2011, there were 136,436 members, including 275 Healthy Kids members, in the Company’s Healthy Families program. The Company offers insured PPO, POS and indemnity products as stand-alone products and as part of multiple option products in various markets. These products are offered by its health and life insurance subsidiaries, which are licensed to sell insurance in 49 states and the District of Columbia. Through these subsidiaries, it also offers auxiliary non-health products, such as life, accidental death and dismemberment, dental, vision and behavioral health insurance. Its health and life insurance products are provided throughout most of its service areas. The Company offers pharmacy benefits, behavioral health, dental and vision products and services (occasionally through relationships with third parties), as well as managed care products related to cost containment for hospitals, health plans and other entities as part of its Western Region Operations segment. The Company provides pharmacy benefit management (PBM) services to Health Net members through its subsidiary, Health Net Pharmaceutical Services (HNPS). As of December 31, 2011, HNPS provided integrated PBM services to approximately 2.7 million Health Net members who have pharmacy benefits, including approximately 587,000 of its Medicare members.

HNPS contracts with national health care providers, vendors, drug manufacturers and pharmacy distribution networks (directly and indirectly through a third party vendor), oversees pharmacy claims and administration, reviews and evaluates new the United States Food and Drug Administration (FDA)-approved drugs for safety and efficacy and manages data collection efforts to facilitate its health plans’ disease management programs. In addition, HNPS provides affiliated and unaffiliated health plans various services, including development of benefit designs, cost and trend management, sales and marketing support and management delivery systems. HNPS outsources certain capital and labor-intensive functions of pharmacy benefit management, such as claims processing, mail order services and pharmacy network services. The Company administers and arranges for behavioral health benefits and services through its subsidiary, Managed Health Network, Inc., and its subsidiaries (collectively MHN). MHN offers behavioral health, substance abuse and employee assistance programs (EAPs) on an insured and self-funded basis to groups in various states, and these programs and services are included as a standard part of most of its commercial health plans. MHN’s benefits and services are also sold in conjunction with other commercial and Medicare products and on a stand-alone basis to unaffiliated health plans and employer groups.

MHN’s products and services were provided to approximately five million individuals as of December 31, 2011, with approximately 134,000 individuals under risk-based programs, approximately 1.8 million individuals under self-funded programs and approximately 3.1 million individuals under EAPs, including those who are also covered under other MHN programs. The Company does not underwrite or administer stand-alone dental or vision products other than the stand-alone dental products that the Company underwrites in Oregon and Washington. During the year ended December 31, 2011, the Company made available to its members in Arizona and California private label dental products through a relationship with Dental Benefit Providers, Inc. (DBP) and private label vision products through a relationship with EyeMed Vision Care LLC (EyeMed). Those stand-alone dental products were underwritten and administered by DBP affiliated companies and the stand-alone vision products were underwritten by Fidelity Security Life Insurance Company and administered by EyeMed affiliated companies. DBP also administers dental products and coverage the Company provides to its members in Oregon and Washington. Liberty Dental Plans of California, Inc. serves as the underwriter and administrator for the dental services it provides to the Company’s Medi-Cal and Healthy Families program enrollees.

Government Contracts Segment

The Company’s Government Contracts segment includes its Government-sponsored managed care federal contract with the Department of Defense under the TRICARE program in the North Region and other health care, mental health and behavioral health government contracts. On April 1, 2011, the Company began delivery of administrative services under a new Managed Care Support Contract (T-3) for the TRICARE North Region. Under the T-3 contract for the TRICARE North Region, the Company provides various types of administrative services, including provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. In 2011, it also provided assistance in the transition into the T-3 contract. Its Government Contracts segment also includes other health care, mental health and behavioral health government contracts that the Company administer for the Department of Defense and the United States Department of Veterans Affairs. Certain components of these contracts are subcontracted to unrelated third parties.

The Company’s wholly owned subsidiary, Health Net Federal Services, LLC (HNFS), administers the T-3 contract with the Department of Defense under the TRICARE program in the North Region. As of December 31, 2011, there were approximately 1.5 million TRICARE eligible beneficiaries enrolled in TRICARE Prime under its T-3 contract. During 2011, HNFS administered 10 contracts with the Department of Veterans Affairs to manage community-based outpatient clinics in eight states. HNFS also administered or supported six other contracts with the Department of Veterans Affairs for 152 Veterans Affairs medical centers for claims repricing and audit services.

Northeast Operations Segment

Beginning on July 1, 2011, the Company’s Northeast Operations segment includes the operations of its businesses that are adjudicating run out claims and providing limited other administrative services to United and its affiliates pursuant to the Claims Servicing Agreements. Subsequent accounting for the Northeast Sale is reported as part of its Northeast Operations reportable segment. The Medicare business was transferred to a United affiliate on January 1, 2011.

The Company competes with Kaiser Permanente, Anthem Blue Cross of California, Blue Shield of California, UnitedHealth Group, Inc., Aetna, Inc., CIGNA Corp., Blue Cross Blue Shield of Arizona, UnitedHealth Group, Inc., Humana Inc., Providence, Regence Blue Cross/Blue Shield, PacificSource, ODS Health Plans, Inc., Lifewise, Magellan Health Services, ValueOptions, Inc. and TriWest Healthcare Alliance.